The Financial Transmission of a Climate Shock: El Niño and US Banks

58 Pages Posted: 22 Nov 2022 Last revised: 1 Feb 2024

See all articles by Filippo De Marco

Filippo De Marco

Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; CEPR Financial Economics

Nicola Limodio

Bocconi University; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; Bocconi University - Baffi Carefin Centre; Centre for Economic Policy Research (CEPR)

Date Written: January 31, 2024

Abstract

This paper investigates how a climate shock is propagated through the banking system. We exploit El Niño, a recurring natural phenomenon inducing quasi-random variation in temperatures across the US. El Niño leads to lower house prices and mortgage lending in counties experiencing temperature increases. Higher temperatures increase water and soil salinity, which negatively affects both crop yields and local natural amenities. Banks exposed to El Niño reduce their mortgage lending even in counties unaffected by temperature increases. Using a LASSO analysis we find that banks with lower operating leverage (i.e., lower expenses on physical premises) are more climate-resilient.

Keywords: Banking, Climate, LASSO, Financial Stability

JEL Classification: G21, Q54, G28

Suggested Citation

De Marco, Filippo and Limodio, Nicola, The Financial Transmission of a Climate Shock: El Niño and US Banks (January 31, 2024). Available at SSRN: https://ssrn.com/abstract=4279194 or http://dx.doi.org/10.2139/ssrn.4279194

Filippo De Marco (Contact Author)

Bocconi University - Department of Finance ( email )

Department of Finance
Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

CEPR Financial Economics ( email )

London
United Kingdom

Nicola Limodio

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.nicolalimodio.com

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Bocconi University - Baffi Carefin Centre ( email )

Via Roentgen 1
Milan
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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